Chapter4 - Chapter 4 Labor Demand Elasticities Relative...

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Chapter 4 Labor Demand Elasticities
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Relative Demand Elasticities
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Different Elasticities along a Demand Curve
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Elasticity of Substitution When two inputs can be substituted at a constant rate, the two inputs are called perfect substitutes When an isoquant is right-angled, the inputs are perfect complements The substitution effect is large when the two inputs are perfect substitutes There is no substitution effect when the inputs are perfect complements (since
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Isoquants Capital Employment q 0 Isoquant 100 200 5 20 Capital Employment q 0 Isoquant Capital and labor are perfect substitutes if the isoquant is linear (so that two workers can always be substituted for one machine). The two inputs are perfect complements if the isoquant is right-angled. The firm then gets the same output when it hires 5 machines and 20 workers as when it hires 5 machines and 25 workers.
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Elasticity Measurement Intuitively, elasticity of substitution is the percentage change in capital to labor (a ratio) given a percentage change in the price ratio (wages to real interest) %∆K/L%∆w/r This is the percentage change in the capital:labor ratio given a 1% change in the relative price of the inputs
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The Short- and Long-Run Demand Curves for Labor Dollars Short-Run Demand  Curve Long-Run Demand  Curve Employment
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This note was uploaded on 01/19/2012 for the course ECON 320 taught by Professor Shin during the Fall '08 term at University of Michigan.

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Chapter4 - Chapter 4 Labor Demand Elasticities Relative...

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